Mortgage loan basics

[edit]Basic

concepts and legal regulation

According to Anglo-American property law, a mortgage occurs when an owner (usually of a fee simple interest in realty) pledges his interest (right to the property) as security or collateral for a loan. Therefore, a mortgage is an encumbrance (limitation) on the right to the property just as an easement would be, but because most mortgages occur as a condition for new loan money, the word mortgage has become the generic term for a loan secured by such real property.[3] As with other types of loans, mortgages have an interest rate and are scheduled to amortize over a set period of time, typically 30 years. All types of real property can be, and usually are, secured with a mortgage and bear an interest rate that is supposed to reflect the lender's risk. Mortgage lending is the primary mechanism used in many countries to finance private ownership of residential and commercial property (seecommercial mortgages). Although the terminology and precise forms will differ from country to country, the basic components tend to be similar: Property: the physical residence being financed. The exact form of ownership will vary

from country to country, and may restrict the types of lending that are possible. Mortgage: the security interest of the lender in the property, which may entail restrictions

on the use or disposal of the property. Restrictions may include requirements to purchase home insurance and mortgage insurance, or pay off outstanding debt before selling the property. Borrower: the person borrowing who either has or is creating an ownership interest in the

property. Lender: any lender, but usually a bank or other financial institution. Lenders may also

be investors who own an interest in the mortgage through a mortgage-backed security. In such a situation, the initial lender is known as the mortgage originator, which then packages and sells the loan to investors. The payments from the borrower are thereafter collected by a loan servicer.[4] Principal: the original size of the loan, which may or may not include certain other costs;

as any principal is repaid, the principal will go down in size. Interest: a financial charge for use of the lender's money. Foreclosure or repossession: the possibility that the lender has to foreclose, repossess or

seize the property under certain circumstances is essential to a mortgage loan; without this aspect, the loan is arguably no different from any other type of loan.

Many other specific characteristics are common to many markets, but the above are the essential features. Governments usually regulate many aspects of mortgage lending, either directly (through legal requirements, for example) or indirectly (through regulation of the participants or the financial markets, such as the banking industry), and often through state intervention (direct lending by the government, by state-owned banks, or sponsorship of various entities). Other aspects that define a specific mortgage market may be regional, historical, or driven by specific characteristics of the legal or financial system. Mortgage loans are generally structured as long-term loans, the periodic payments for which are similar to an annuity and calculated according to the time value of money formulae. The most basic arrangement would require a fixed monthly payment over a period of ten to thirty years, depending on local conditions. Over this period the principal component of the loan (the original loan) would be slowly paid down through amortization. In practice, many variants are possible and common worldwide and within each country. Lenders provide funds against property to earn interest income, and generally borrow these funds themselves (for example, by taking depositsor issuing bonds). The price at which the lenders borrow money therefore affects the cost of borrowing. Lenders may also, in many countries, sell the mortgage loan to other parties who are interested in receiving the stream of cash payments from the borrower, often in the form of a security (by means of a securitization). Mortgage lending will also take into account the (perceived) riskiness of the mortgage loan, that is, the likelihood that the funds will be repaid (usually considered a function of the creditworthiness of the borrower); that if they are not repaid, the lender will be able to foreclose and recoup some or all of its original capital; and the financial, interest rate risk and time delays that may be involved in certain circumstances. [edit]Mortgage

loan types

There are many types of mortgages used worldwide, but several factors broadly define the characteristics of the mortgage. All of these may be subject to local regulation and legal requirements. Interest: interest may be fixed for the life of the loan or variable, and change at certain

pre-defined periods; the interest rate can also, of course, be higher or lower. Term: mortgage loans generally have a maximum term, that is, the number of years after

which an amortizing loan will be repaid. Some mortgage loans may have no amortization, or require full repayment of any remaining balance at a certain date, or even negative amortization.

Payment amount and frequency: the amount paid per period and the frequency of

payments; in some cases, the amount paid per period may change or the borrower may have the option to increase or decrease the amount paid. Prepayment: some types of mortgages may limit or restrict prepayment of all or a portion

of the loan, or require payment of a penalty to the lender for prepayment. The two basic types of amortized loans are the fixed rate mortgage (FRM) and adjustable-rate mortgage (ARM) (also known as a floating rateor variable rate mortgage). In many countries (such as the United States), floating rate mortgages are the norm and will simply be referred to as mortgages. Combinations of fixed and floating rate are also common, whereby a mortgage loan will have a fixed rate for some period, and vary after the end of that period. In a fixed rate mortgage, the interest rate, and hence periodic payment, remains fixed for

the life (or term) of the loan. Therefore the payment is fixed, although ancillary costs (such as property taxes and insurance) can and do change. For a fixed rate mortgage, payments for principal and interest should not change over the life of the loan, In an adjustable rate mortgage, the interest rate is generally fixed for a period of time,

after which it will periodically (for example, annually or monthly) adjust up or down to some market index. Adjustable rates transfer part of the interest rate risk from the lender to the borrower, and thus are widely used where fixed rate funding is difficult to obtain or prohibitively expensive. Since the risk is transferred to the borrower, the initial interest rate may be from 0.5% to 2% lower than the average 30-year fixed rate; the size of the price differential will be related to debt market conditions, including the yield curve. The charge to the borrower depends upon the credit risk in addition to the interest rate risk. The mortgage origination and underwriting process involves checking credit scores, debt-toincome, downpayments, and assets. Jumbo mortgages and subprime lending are not supported by government guarantees and face higher interest rates. Other innovations described below can affect the rates as well Credit history or credit report is, in many countries, a record of an individual's or company's past borrowing and repaying, including information about late payments and bankruptcy. The term "credit reputation" can either be used synonymous to credit history or to credit score. In the U.S., when a customer fills out an application for credit from a bank, store or credit card company, their information is forwarded to acredit bureau. The credit bureau matches the name, address and other identifying information on the credit applicant with information retained

by the bureau in its files.That's why it's very important for creditors, lenders and others to provide accurate data to credit bureaus. [1]
What Is a Credit Report? A credit report is a record of your credit activities. It lists any credit-card accounts or loans you may have, the balances, and how regularly you make your payments. It also shows if any action has been taken against you because of unpaid bills. Where Do Credit Reports Come from? A company that gathers and sells credit information is called a consumer reporting agency (CRA). These types of companies collect information about your credit activities, store it in giant databases, and charge a fee for supplying the information. The most common type of CRA is the credit bureau. There are three major credit bureaus that operate nationwide, plus many smaller companies serving local markets. What Is a Credit Rating? Your credit rating is drawn from your credit report, which outlines your borrowing, charging, and repayment activities. A good rating helps you reach financial goals; a poor rating limits your financial opportunities. Since your credit report influences whether you are able to buy a home and get a job, it is extremely important to protect your credit rating by making loan and bill payments on time and by not taking on more debt than you can handle. Who Is Allowed to See Your Credit Report? Credit bureaus can provide information only to the following requestors: (1) creditors who are considering granting or have granted you credit; (2) employers considering you for employment, promotion, reassignment, or retention; (3) insurers considering you for an insurance policy or reviewing an existing policy; (4) government agencies reviewing your financial status or government benefits; and (5) anyone else with a legitimate business need for the information, such as a potential landlord. Credit bureaus also furnish reports if required by court orders or federal jury subpoenas. They will also issue your report to a third party if you request this in writing. What Type of Information Is on Your Credit Report? There are usually four types of information:

1.

Identifying Information: Your full name, any known aliases, current and previous addresses, social security number, year of birth, current and past employers, and, if applicable, similar information about your spouse. Credit Information: The accounts you have with banks, retailers, credit-card issuers, utility companies, and other lenders (accounts are listed by type of loan, such as mortgage, student loan, revolving credit, or installment loan; the date you opened the account; your credit limit or the loan amount; any co-signers of the loan; and your payment pattern over the past two years).

2.

3.

Public Record Information: State and county court records on bankruptcy, tax liens, or monetary judgments (some consumer reporting agencies list non-monetary judgments as well). Recent Inquiries: The names of those who have obtained copies of your credit report within the past year (two years for employment purposes).

4.

Where Do the Consumer Reporting Agencies Get Their Information? Credit bureaus collect information from parties that have previously extended credit to you, such as a department store that issued you a credit card or a bank that granted you a personal loan. Who Decides whether or not to Grant You a Loan? The lenders themselves make the decision about whether or not to grant you credit. The creditreporting companies only supply the information about your credit history. Why Should You Obtain a Copy of Your Credit Report? To avoid any unwelcome surprises, it's important to see a copy of your credit report before you apply for credit such as car loans, mortgages, or credit cards. Errors in credit reports can be common. Keep in mind, however, that they are not part of a conspiracy against you. They are simply the result of human error. How Do Errors in Reports Happen? Think about how often your mail has a misspelling of your name or a mistake in your street address. Then, imagine the possibility for error in a report that contains much more information about you. Cases of mistaken identity, out-of-date information, and outright errors can easily occur. How Do You Correct an Error on Your Credit Report? Contact the consumer credit reporting agency immediately. The company is then responsible for researching and changing or removing incorrect data. This process may take as long as 45 days. At your request, a corrected report will be sent to those parties that you specify who have received your report within the past six months, or employers who have received it within the last two years. What if the Consumer Reporting Agency Stands by Its Report? You have the right to present your side of the story in a brief statement (100 words or less), which the credit bureau must attach to your credit file. Your statement should be used to clarify inaccuracies, not explain reasons for delinquency. Anyone requesting a copy of your credit report would also automatically receive your statement (or a summary of it), unless the credit bureau decides that it is irrelevant or frivolous. What Should You Do if You Are Denied Credit because of Something in Your Credit Report? The lender who denied you credit must give you the name and address of the credit bureau that produced the credit report. Then, you have up to 30 days to request a free copy of your report. The credit bureau must tell you the nature and substance of all information contained in your report. It must also tell you the sources of the information and who has received your report for the previous six months (two years for reports furnished for employment purposes).

Late and missed payments will show up on your credit report and hurt your chances of being approved for credit, life insurance, or employment. To find out about organizations in your area that help consumers solve credit problems and create a budget, contact the National Foundation for Consumer Credit at (800) 388-2227. Spanish speakers can call (800) 682-9832. Additional information on improving a credit rating can be found in "How to Establish, Use, and Protect Your Credit," a brochure by the Federal Reserve Bank of San Francisco. How Long Does Information Stay on Your Credit Report? Generally, all your credit history information, good or bad, remains on your report for seven years. If you file for personal bankruptcy, that fact remains on your credit report for 10 years. How Do You Get a Copy of Your Credit Report? You are entitled to receive one free credit report every 12 months from each of the nationwide consumer credit reporting companiesEquifax, Experian and TransUnion. This free credit file can be requested through www.annualcreditreport.com or by contacting the companies directly by phone or by mail as listed below. To process your request, you will need to provide specific information, such as your name, current and previous addresses, telephone number, social security number, and date of birth. Also, to verify your identity, other information such as a copy of your driver's license, utility bill(s), or bank statement may be required. Keep in mind that the three large bureaus do not necessarily share information with each other. The content of your credit report can be different at each bureau, so it's a good idea to request copies from each one.

Reverse Mortgage
What Does Reverse Mortgage Mean? A type of mortgage in which a homeowner can borrow money against the value of his or her home. No repayment of the mortgage (principal or interest) is required until the borrower dies or the home is sold. After accounting for the initial mortgage amount, the rate at which interest accrues, the length of the loan and rate of home price appreciation, the transaction is structured so that the loan amount will not exceed the value of the home over the life of the loan. Often, the lender will require that there can be no other liens against the home. Any existing liens must be paid off with the proceeds of the reverse mortgage.

Investopedia explains Reverse Mortgage A reverse mortgage provides income that people can tap into for their retirement. The advantage of a reverse mortgage is that the borrower's credit is not relevant, and is often unchecked, because the borrower does not need to make any payments. Because the home serves as collateral, it must be sold in order to repay the mortgage when the borrower dies (in some cases, the heirs have the option of repaying the mortgage without selling the home). These types of mortgages have large origination costs relative to other types of mortgages. These costs become part of the initial loan balance and accrue interest. Senior citizen borrowers with good credit should carefully analyze the options of a more traditional mortgage, such as a home equity loan, against a reverse mortgage.
Warehouse lending is a specialized type of lending that commercial banks and other finance institutions provide to companies involved in the mortgage banking business. The loan that was closed with XYZ finance company or the small community bank will get funded with

money provided by this credit facility and the documentation will be sent to the institution that has the warehouse lending facility to act as collateral for the line of credit.
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